Lawmakers Gird for Next Fiscal Clash, on the Debt Ceiling
By MICHAEL D. SHEAR and JACKIE CALMES
Published: January 2, 2013

WASHINGTON — With the resolution of the year-end fiscal crisis just hours old, the next political confrontation is already taking shape as this city braces for a fight in February over raising the nation’s borrowing limit. But it is a debate President Obama says he will have nothing more to do with.

Even as Republicans vow to leverage a needed increase in the federal debt limit to make headway on their demands for deep spending cuts, Mr. Obama — who reluctantly negotiated a deal like that 18 months ago — says he has no intention of ever getting pulled into another round of charged talks on the issue with Republicans on Capitol Hill.

“I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed,” the president said Tuesday night after he successfully pushed Republicans to allow tax increases on wealthy Americans. On Wednesday, he signed the legislation.

The president’s position is sure to appeal to his liberal allies, who fear another round of compromises by Mr. Obama. But it once again sets the stage for a nail-biting standoff that economists warn could lead to a damaging financial default and doubt from investors about the ability of the country to pay its obligations.

Moody’s, the rating agency, warned on Wednesday that the looming political battles over the nation’s debt could lower the group’s rating of American debt.

“We’re in for another round of brinkmanship and uncertainty,” said Mark Zandi, the chief economist at Moody’s Analytics, who predicted weeks of “angst, discussion and hand-wringing” in Washington. “I don’t think the economy can really find its footing and jump to a higher level of growth until we get to the other side of this.”

Joel Prakken, senior managing director of Macroeconomic Advisers, an economics forecasting firm, said bluntly, “This is kind of a mess.”

The financial imperative for an increase in the debt limit comes at a time of increasingly sour relations between the president and his Republican adversaries in the House. To secure a deal to avert automatic tax increases and spending cuts on Jan. 1, Mr. Obama was forced into last-minute talks with Senator Mitch McConnell of Kentucky, the Republican leader, after weeks of negotiations with Speaker John A. Boehner in the House collapsed amid acrimony and internal Republican dissension.

Now, the president and Mr. Boehner are signaling a fresh round of take-it-or-leave it stands that are in sharp opposition: The president says increasing the borrowing limit is nonnegotiable, while Republicans say the House is all but certain to pass a bill that raises the debt limit only in exchange for significant cuts — a challenge to Mr. Obama and the Democratic-controlled Senate.

Smarting from the president’s victory on taxes over the New Year’s holiday, Republicans in Congress are betting that their refusal to raise the $16.4 trillion debt ceiling will force Mr. Obama to the bargaining table on spending cuts and issues like changes in Medicare and Social Security.

But doing so would inevitably reprise the bitter debate over the debt ceiling that took place in the summer of 2011, when the government came close to defaulting on its debt before lawmakers and the president agreed to a 10-year package of spending cuts in exchange for Republican agreement to raise the debt ceiling by about the same amount.

And that is exactly what Republicans want — again.

“If they want to get the debt limit raised, they are going to have to engage and accept that reality,” said Brendan Buck, a spokesman for Mr. Boehner. “The president knows that.”

Senator Patrick J. Toomey, Republican of Pennsylvania, said flatly that his party should risk the possibility of default — including interruptions in federal benefit checks and paychecks for government workers — if it was the only way to compel the president to support deep spending cuts that will reduce the deficit.

“That’s disruptive, but it’s a hell of a lot better than the path that we’re on,” Mr. Toomey said Wednesday on MSNBC. “We absolutely have to have this fight over the debt limit.”

The Republican Party’s caucus in the House will discuss a debt ceiling strategy at a private retreat in Williamsburg, Va., this month, according to a top Republican aide, who said they were determined to insist again on spending cuts that equal the amount of increase in how much the country can borrow.

“The speaker told the president to his face that everything you want in life comes with a price,” the aide said. “That doesn’t change here. I don’t think he has any choice.”

White House officials say Mr. Obama is equally determined to avoid letting the debt ceiling become a regular Republican tool for extracting concessions on spending on programs popular with Democratic constituents.

“It means that he won’t negotiate on it,” a senior administration official said Wednesday about the president’s comments. ”He’s not entertaining offers about it. We’re not having meetings about it.”

The official, who asked for anonymity to discuss legislative strategy, said the debt limit “was never used as a policy leverage tool before.”

“This is them paying the bills for the spending that they racked up,” the official said. “They need to do that.”

Some people in both parties questioned why Mr. Obama would so emphatically vow not to negotiate over the debt limit, a promise he may ultimately be forced to break if necessary to avoid economic shock waves.

“It’s bizarre,” said one veteran Democratic senator who would not be named, citing the proven willingness of Republicans to force a fiscal crisis unless the president makes a deal for additional spending cuts.

Mr. Obama resolved immediately after the 2011 debt crisis, privately and publicly, that he would not be drawn again into negotiations over the borrowing limit. He has said that presidents and Congresses have a fundamental, shared responsibility to ensure that the government pays bills that it owes to its citizens and creditors.

In saying he will refuse to bargain over the debt limit, Mr. Obama is counting on help from the business community, given its traditional ties to Republicans. Recently, for example, the head of the Business Roundtable, John Engler, a Republican and former governor of Michigan, called for extending the debt limit for five years.

“You don’t put the full faith and credit of the United States’ finances at risk,” said David M. Cote, chairman of Honeywell and a Republican member of the 2010 Simpson-Bowles fiscal commission. “The whole idea of using debt ceiling that way or saying ‘I’ll do this horrible thing to all of us unless you give in’ just doesn’t make any sense for anybody. It makes me very nervous. It’s not a smart way to run the country.”

Mr. Obama might also take to the road again, using the power of his office in an effort to convince the public that another fight over the debt ceiling risks another economic crisis. Public polls after the last debt ceiling fight suggested that more people blamed Republicans for the threat of a shutdown.

“If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff,” Mr. Obama said Tuesday.

The fiscal cliff is dead—but the era of semi-permanent fiscal policy crisis is still with us. Indeed, if anything, the resolution of the cliff has simply served to set up a quantitatively smaller but qualitatively much more terrifying cliff two months from now. That’s when the country once again reaches a crisis over the lapsing of the Treasury Department’s authority to borrow money.

Once upon a time, when Congress wanted to instruct the federal government to spend more money than it was going to collect in taxes, it would specifically authorize bond sales. During World War I this was deemed inconvenient, and Congress instead generically authorized the borrowing of a bunch of money to finance its appropriations. Since this number was specified in nominal dollar terms, inflation and economic growth ensured that over time we would hit this new debt ceiling under any conceivable fiscal policy. So then Congress would raise it. And we would hit it again.

Over time, a tradition of partisan grandstanding emerged. Even though the need to borrow more is driven entirely by the nexus of tax and spending laws Congress has passed, operationally the request for a higher debt ceiling must be submitted by the Treasury secretary. That’s a golden opportunity for opposition members of Congress to castigate the incumbent administration for its irresponsibility, even though everyone knows it ultimately has to be raised. Or at least they did until 2011, when Republicans coalesced around the “Boehner rule” that every dollar of increased borrowing authority should be offset by a dollar of spending cuts. The Obama administration reacted by taking the bait and trying to entice Boehner into a “grand bargain.” It didn’t work, and instead we got the Budget Control Act and the automatic sequester cuts that became part of the fiscal cliff.

Initially, hopes were high in Washington that the cliff might be averted by—again—a grand bargain on the long-term deficit. But this week’s deal doesn’t do that. It extends somewhat more of the Bush tax cuts than Obama wanted to extend, offers no new spending cuts, and on the sequester it simply punted. Implementation was delayed two months until the beginning of March, thus creating a brand-new “cliff” of cuts to domestic and military programs that would hurt the economy and allegedly harm military preparedness.

And while this cliff is much smaller in scale than the full cliff that was narrowly avoided on New Year’s Day, it’s much more terrifying because it will arrive in the beginning of March when we’re hitting the debt ceiling again.

Or, rather, the Treasury Department says we already hit it earlier this week. For now, they can pay the government’s bills with a few accounting tricks rather than with more borrowing. But these “extraordinary measures” can only work for so long. Treasury won’t say exactly when the bag of tricks runs out, but past experience tells us it’s about two months. And this sets up an interesting collision, since the administration has sworn to the press, Senate Democrats, and yours truly that they have no intention of bargaining over the debt ceiling a second time.

Their view—and it’s a correct one—is that authorizing the executive branch to pay bills that Congress has already legally required the Treasury to pay is not a “concession” to be bargained over. Even establishing the precedent that there will be bargaining over the point is dangerous since a bargain might always fail and create a disaster scenario in which there’s no way to avoid defaulting on legally valid federal obligations.

Meanwhile, Obama’s negotiation of the fiscal cliff deal has raised grave doubts about his credibility on the debt ceiling. The deal itself is fine on the merits, but it is based on the president violating what seemed like a firm commitment not to extend tax cuts for people earning more than $250,000 a year. White House officials explained, among other things, that it was unlikely moderate Senate Democrats would really hold that line if we went over the cliff. So is the debt ceiling really any different? If House Republicans hold firm on the Boehner rule, are Democratic senators from Arkansas, South Dakota, Alaska, North Carolina, and other red states going to have Obama’s back on a no-bargaining stance? Will Obama be willing this time to hold a line that red state Democrats aren’t? I have my doubts, and House Republicans do, too.

The intersection of the sequester cuts and the debt ceiling may provide a way out. Obama and the GOP could agree on a package of cuts to replace the sequester, and that legislation could also hike the debt ceiling. That would let Republicans say the debt ceiling hike was paired with spending cuts, while Obama can say he negotiated the sequester, not the debt ceiling. But that still leaves the question of what package of cuts the two sides could agree to. House Republicans have been pretty clear that they want to replace the sequester’s military cuts with cuts to anti-poverty programs, and Obama’s been very clear that he’ll agree to no such thing. Instead, he’s said any further cuts will have to be balanced by further tax increases. Back to the grand bargain in other words, even as that bargain looks no more realistic today than it did three weeks ago.

In other words, the whole exhausting saga is going to go around and around. Welcome to the permanent fiscal emergency.

There are two ways to look at the policy fights in Washington. One is that the just-completed fiscal cliff deal is one round of four, with each side emboldened to approach the next round with new wind at their backs. The other is that the fiscal cliff deal sets the tone for the next three battles, and each, while painful and full of theater, will resolve themselves somewhat predictably.

Remember: The debt ceiling expired at the end of the year, but the Treasury can move money around until the middle of February. That's "Round Two." Round Three is the resumption of the sequester spending cuts, which are mandated by the 2011 Budget Control Act; half will come from defense, half will come from domestic spending. The budget deal delayed their implementation by two months, to March 2. Round Four is the budget for 2013; the government's blueprint for obtaining and spending money becomes moot on March 27.

Republicans would seem to have the upper hand, at least somewhat, because the first "round" had nothing to say about spending cuts, which Democrats want to avoid. All the bargaining from here on out will be about what to cut, because, by law, about $110 billion worth of deficit must eliminated budget by the end of the year. Leverage!

But it's hard to see how that works in reality. They've got some leverage, because there will be spending cuts, but not as much as it seems. First, just remember that "deficit reduction" and "spending cuts" aren't the same thing. If a magical new source of revenue is found between now and March 2, like, for example, the government discovers $110 billion worth of gold bars in a bunker somewhere, they can reduce the deficit without cutting anything. That's obviously not going to happen, but there are many, many different ways to close the mandated gap without simply cutting a lot of money from programs.

Now, Republicans are going to insist that Democrats agree to immediate discretionary and entitlement cuts above and beyond anything already budgeted, and it is fair to assume that spending cuts of a certain (and uncomfortable to Democrats) magnitude will be the line in the sand that Speaker John Boehner will draw.

Democrats and President Obama are going to insist that the sequester cuts and any subsequent cuts be accompanied by revenue-raising measures like tax increases, levies, and tax reform. (The money available is limited by deduction limits for those making above $250,000 Obama asked for as part of the first fiscal deal.)

But what Obama really has done is delayed the inevitable. He has a bunch of concessions that he knows he has to make — Medicare cuts among them — that he did not have use up to get Republicans on board with the change in marginal tax rates. One reason why Democrats balked so quickly at the Republican proposal to change the cost-of-living adjustment formula for entitlements is that they'd rather lose that fight later.

Also, Republicans have to specify how they want to cut the budget. Obama doesn't have to do that. He has already suggested a willingness to accept Medicare COLA changes, and he asked Republicans for ideas on revenue-raisers. In appearing to compromise his campaign position that taxes for people earning more than $250,000 would go up — a marker for defining the middle class, something very important to some Democratic activists — he has given Republicans the responsibility for detailing their own "ask."

Here is a thought experiment: Going over the fiscal cliff would have damaged the economy and thrown it back into a recession. Defaulting on the national debt would probably send the economy into a depression. Why would the Republicans, who, after all, were reasonable enough to vote on a tough deal to avert the fiscal cliff, refuse to make a deal on legislation to avert the debt ceiling default, which would imperil the country and anger their donor base even more?

It may be wiser for Republicans to use all of their leverage to insist on deep cuts during the sequester fight without upsetting the financial markets by holding the debt ceiling over the president's head. The president is counting on Republicans to be unreasonable, but if they aren't, then he loses some of the political leverage he has.

President Obama's decision to agree to a "fiscal cliff" deal that doesn't address the debt ceiling was premised on the thinking that congressional Republicans will not be as successful at holding the economy hostage in the coming months as they were in the summer of 2011. For one thing, the administration believes the business community, and elite opinion more broadly, will be much more vocal than they were last time around in cautioning Republicans against debt-ceiling hijinx.

Is this a fair assumption to make? Well, there are already signs that business leaders will in fact be more outspoken (not difficult, given that they were virtually mute in 2011). “You don’t put the full faith and credit of the United States’ finances at risk,” David M. Cote, chairman of Honeywell and a Republican member of the 2010 Simpson-Bowles fiscal commission, told the New York Times yesterday. “The whole idea of using debt ceiling that way or saying ‘I’ll do this horrible thing to all of us unless you give in’ just doesn’t make any sense for anybody. It makes me very nervous. It’s not a smart way to run the country.”

But it's looking as if elite opinion more broadly is more sanguine about another debt-ceiling showdown than the White House had hoped. It is striking to what degree the Washington establishment has come to normalize Republican hostage-taking of the debt limit, to see it as a predictable and almost natural element of the political landscape. Greg Sargent argues convincingly why this is a problem, noting that the debt ceiling must be raised to pay for past spending, and should not be used as a chip in negotiating future budgets: "In the current context, conservatives and Republicans who hold out against a debt limit hike are, in practical terms, only threatening the full faith and credit of the United States — and threatening to damage the economy — in order to get what they want. Any accounts that don’t convey this with total clarity — and convey the sense that this is a normal negotiation — are essentially misleading people. It’s that simple."

What bears stating even more strongly, though, is how far we've come from 2011, when the Washington establishment viewed the Republicans' threat of credit default as as the utterly brazen and unprecedented step that it was. Even those who supported the gambit recognized it as a newly deployed weapon. "While opposition to raising the debt ceiling is common, using the face-off to extract real concessions is less so," conservative economist Kevin Hassett, of the American Enterprise Institute, wrote in January 2011.

News reports on the threat of default cast it as a truly risky move: "The debt ceiling debate presents some congressional Republicans with an unhappy choice: A vote to raise the ceiling might expose them to primary challenges in the 2012 election, while a vote against it risks a default on U.S. debt obligations that could jeopardize the fragile economic recovery," wrote Peter Nicholas of the Los Angeles Times that May. As the deadline neared, the tenor of the coverage grew even more ominous: "Georgia Republicans today will help decide whether Washington's unprecedented debate over the federal debt ceiling should be pushed closer to the edge of --- or even beyond --- a potentially dangerous Tuesday deadline," the Atlanta Journal-Constitution reported on July 28. Even after the crisis had passed, official Washington looked on the Republican strategy with a mix of awe and horror -- I was part of a major effort at the Washington Post to reconstruct the year-long tale of how the House GOP came to embrace this previously unthinkable approach.

Now? Political convention has successfully been defined down, and the Republicans' stated intent to hold the debt-ceiling hostage again is being viewed as a matter of course. This Politico report on Tuesday is representative of the Beltway establishment's acceptance of the negotiating tactic:

Quote:

The fiscal cliff has consumed Washington for months, but it may end up being the long opening act for a fiscal drama with even higher stakes: the debt ceiling. Even as senators breathed a sigh of relief and overwhelmingly passed a historic tax deal to avert the much-feared fiscal cliff early Jan. 1, Congress was already lurching right into the new round of brinksmanship. Congress will have to raise the Treasury Department’s $16.4 trillion borrowing limit by late winter, and Republicans see the debate as their best opportunity to extract spending cuts out of the White House. That’s why they effectively conceded the tax rate battle to President Barack Obama and agreed to a fiscal cliff deal that, if cleared by the House, will raise taxes on individuals making more than $400,000, and couple making more than $450,000.

The Washington Post's Chris Cillizza was more blunt in casting the debt-ceiling limit as the natural next step in negotiations: "Make no mistake: No deal on the fiscal cliff was a political loser for Republicans; this is an issue they needed to get off the table in order to find better political ground — debt ceiling — to make their stand."

So: a threat to plunge the nation's into default and with it imperil the nation and world's economy, seen only a year and a half ago as the political equivalent of a nuclear option, is now viewed as "better political ground." What to make of this? The shift in mindset is surely in part a function of basic human nature: our remarkable ability -- for good or ill -- to adapt ourselves to new realities. More than that, though, it is a function of that far more Beltway-unique tendency, to report and comment on politics and governance as pure gamesmanship in such a way that conveys savvy but not judgment. And if it's all a sport, who's to object if one side has radically shifted the goalposts? Good for them, if they can get away with it. And after all, the higher the stakes in the clash, the better the story.

It's one thing if this blitheness about the coming hostage-taking is contained within the Beltway. But if this perception starts to percolate out more broadly, the White House is in far weaker position heading into the next round than it would like to believe.

I think the biggest problem coming to a deal here is that the GOP will rightly insist on spending cuts, but will also insist that Obama propose them. They have had a very difficult time coming up with cuts to entitlements they support, and I see no reason Obama will do the job for them, especially when he knows they will attack him for it.

We got a taste of this already, as soon as Obama was considering the change to chained-CPI Senate Republicans were publicly attacking him for wanting to cut benefits. How do you negotiate with a party that doesn't even know what it wants?

__________________
Homer: [looking at watch] Two hours? Why'd they build this ghost town so far away?
Lisa: Because they discovered gold over there!
Homer: It's because they're stupid, that's why. That's why everybody does everything.

I think the biggest problem coming to a deal here is that the GOP will rightly insist on spending cuts, but will also insist that Obama propose them. They have had a very difficult time coming up with cuts to entitlements they support, and I see no reason Obama will do the job for them, especially when he knows they will attack him for it.

We got a taste of this already, as soon as Obama was considering the change to chained-CPI Senate Republicans were publicly attacking him for wanting to cut benefits. How do you negotiate with a party that doesn't even know what it wants?

This brings up the new GOP strategy, which is to not negotiate with the White House at all anymore. This was discussed in The Hill. They will try to just go through the normal legislative process and negotiate with the Senate in a closed-door conference committee, leave the WH out and basically dare Obama to veto anything that passes both chambers.

I actually think its a pretty canny strategy, and don't know if Boehner has any choice considering the skepticism his backbenchers view these WH negotiations with now, but it puts a big target on what I was just saying. By going this route, the GOP has no way to force Obama to propose the spending cuts. They have to originate it themselves and pass it through the House. As good of a game they talk about wanting spending cuts, they don't have a lot of real ideas in that dept besides wholesale destruction of Medicare replaced by Premium Support, which doesn't stand a chance in the Senate.

__________________
Homer: [looking at watch] Two hours? Why'd they build this ghost town so far away?
Lisa: Because they discovered gold over there!
Homer: It's because they're stupid, that's why. That's why everybody does everything.

I think the biggest problem coming to a deal here is that the GOP will rightly insist on spending cuts, but will also insist that Obama propose them. They have had a very difficult time coming up with cuts to entitlements they support, and I see no reason Obama will do the job for them, especially when he knows they will attack him for it.

We got a taste of this already, as soon as Obama was considering the change to chained-CPI Senate Republicans were publicly attacking him for wanting to cut benefits. How do you negotiate with a party that doesn't even know what it wants?

This brings up the new GOP strategy, which is to not negotiate with the White House at all anymore. This was discussed in The Hill. They will try to just go through the normal legislative process and negotiate with the Senate in a closed-door conference committee, leave the WH out and basically dare Obama to veto anything that passes both chambers.

I actually think its a pretty canny strategy, and don't know if Boehner has any choice considering the skepticism his backbenchers view these WH negotiations with now, but it puts a big target on what I was just saying. By going this route, the GOP has no way to force Obama to propose the spending cuts. They have to originate it themselves and pass it through the House. As good of a game they talk about wanting spending cuts, they don't have a lot of real ideas in that dept besides wholesale destruction of Medicare replaced by Premium Support, which doesn't stand a chance in the Senate.

The whole idea behind bypassing the White House is so that the Senate hammers out a centrist bargain, and the House would further negotiate it to the right.

I agree it's a cunning strategy, but it's only going to further shield the President from blame if it doesn't work out.